Russian, Chinese gas deal implications

By : Alsir Sidahmed

Qatari officials felt greatly dismayed when they discovered that, unlike their fellows in other Gulf countries, their emirate has more gas resources than crude oil. That was in the 1970s when oil was in the limelight on the world stage.

Oil continues to occupy its traditional central geopolitical position but gas is doing rather well, not only as a source of clean energy but also in terms of its geopolitical implications.
The recent Russian-Chinese gas deal sealed between Moscow and Beijing late last month simply underscores the new emerging fact.

More than 60 years ago, Mao Zedong of China traveled to Moscow to sign the Sino-Soviet Treaty of Friendship, Alliance, and Mutual Assistance.

On May 23, an agreement between the new leaders of the two countries Vladimir Putin and his Chinese counterpart Xi Jinping was signed causing a flurry of arguments about its implications for the industry and changing world politics in general. Gas was at the heart of these arguments.

No wonder the deal worth some $400 billion will go on for three decades, whereby Russia’s giant Gazprom will supply the Chinese conglomerate China National Petroleum Company (CNPC) with 38 billion cubic meters (BCM) annually starting in four years’ time and the volume is expected to increase to 130 BCM.

The fact that the two countries have been negotiating this deal for some ten years and that it was concluded in the last minutes of the 2-day visit by Putin showed clearly that the timing was of essence.

Come Friday, Putin most likely will be meeting his Western counterparts.

Though the gathering has been planned in advance to celebrate the 70th anniversary of the D-Day invasion that put an end to the Second World War, where both Russia and its Western allies were on one front, but it is still an occasion where some hard bargaining will take place given the standoff over Ukraine crisis.

Putin will feel that he is relatively in a better position to withstand Western pressures.
He has alternatives in terms of markets and diplomatic support if the Western leaders are to repeat threats of more sanctions against Moscow.

Moreover, Moscow will have a secured market for its huge gas reserves that will consolidate already growing economic and financial relations between the two countries.
China is already Russia’s largest single commercial partner, with bilateral trade standing at $90 billion in 2013. Even before the gas deal, the two sides were hoping to double that volume in seven years’ time.

That will provide Russia with a financial alternative in case Western banks opted or are forced to join growing punitive measures against Moscow.

China could help Russia fill the gap and minimize the impact of Western sanctions.
Besides, even with such reduced prices, Russia can still afford them because it is simply much cheaper to pipe gas than to chill, compress and liquefy the stuff to minus 161 degrees Celsius, and then ship it to customers.

On its part, China needs the deal badly as it provides a good diversifying source of energy and a nearby one that does not carry with it the typical security concerns shown clearly in the two choking crossing points of the Strait of Hormuz and Malacca.

More significant, this gas deal will help China’s drive to reduce its dependence on coal with all its environmental hazards and pollution that has become a serious issue in major Chinese cities.

But more important is the implication for the energy market.

The Chinese, sensing Putin’s desperate need to seal the deal, have definitely got a better price than one offered before.

The price implication will exceed the mere bilateral interests of the two signatory countries to both producers and consumers of gas given the fact it stands below the prevailing gas prices traded in the Asian market and more or less reflects a mechanism based on calculations related to crude oil price.

At a time when the Japanese and other Asian buyers are putting a $14 a unit for the gas they purchase, the North Americans are enjoying a price as low as $4 a unit thanks to the fracturing revolution that has unleashed huge gas supplies.

The price Beijing got from Moscow is thought to be closer to what Americans are paying, not the Japanese.

A direct result of this will impact planned or already under construction gas projects be it in Australia, Canada or East Africa like Tanzania or Mozambique, which will turn the market into one favoring buyers, who according to the Oxford Institute for Energy Studies will foresee the day when Asian buyers will form their own price hub for natural gas.